Transcript ESOP POWER - ATI Capital Group, Inc. | Providing Total

CORPORATE TRANSITION
Advanced Options Strategy
For
Privately Held Business
Presented by:
ATI Capital Group, Inc.
Capital Markets
– An Overview
Sales
($millions)
5
Small
Businesses
150
Lower
Middle
M I d d l e
5.4MM
2-3x
500
1,000
Upper
M a r k e t
Companies
300,000
4-7x
8-9x
Large
2,000
10-11x
>12x
Potential Buyers
• An Individual
• A Corporation
• A Qualified Plan
ATICG © 2001-2005
ATI Capital Group, Inc.
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Where to Get Stock in a
Private Company
• From an Existing Shareholder
• From the Corporation that MAKES IT!
ATICG © 2001-2005
ATI Capital Group, Inc.
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Business Transfer Spectrum
TRANSFER
TRANSFER
Employees
Charitable
Trusts
Family
CHANNELS
Co-Owners
T R A N S F E R
ESOPs
Management
Buyouts/Ins
Phantom
Stock
Stock Appreciation Rights
Charitable
Remainder
Trusts
Charitable
Lead Trusts
Outright
Gifts
SCINs
Annuities
GRATs
FLPs
IDGTs
INTERNAL
TRANSFERS
MOTIVES
Outside
Outside
[Retire]
[Continue]
Public
M E T H O D S
Buy/Sell
Russian
Roulette
Dutch
Auction
Right of
First
Refusal
Negotiated
One-Step
Private
Auctions
Two-Step
Private
Auctions
Consolidate
Roll-ups
Buy and
Build
Recapitalizations
EXTERNAL
TRANSFERS
Initial Public
Offerings
Direct Public
Offerings
Reverse
Mergers
Going
Private
External Transfers
● These are typically the big liquidity events
● The market value world dominates here
● 3 Subworlds: Asset, Financial, and
Synergy
● We don’t want to transfer in Asset market
value (although most private companies
will transfer in this Sub-world)
It’s a Recast World
Which level of earnings do you choose?
●
●
●
Reported EBITDA
Recast EBITDA
Synergized recast EBITDA
Equity
Recapitalizations
● Some businesses have major growth opportunities
● These owners may wish to take some chips off the
table but still participate in the upside
● In an “equity recap,” owners sell some part of the
business to a private equity group now, and the rest
later (80/20% is popular)
● Negotiate the selling price and terms at the same time
● The second sale in 5-6 years usually nets more to the
owner than the first sale
Internal Transfers
•
•
•
•
•
•
•
Generally staged transactions
A process not an event
You have greater control over the process
Greater flexibility in structure and outcome
More rules and regulations to follow
Have to “deal” with the IRS
Results can be very powerful
ATICG © 2001-2005
ATI Capital Group, Inc.
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What is an ESOP
• ESOP = Employee Stock Ownership Plan
• An ESOP is a QUALIFIED PLAN under
the Employees’ Retirement Income
Security Act of 1974 (ERISA)
• See Sections 401(a), 4975(e)(7), and
501(a) of the Internal Revenue Code of
1986, as amended, and Section 407(d)(6)
of ERISA, 1974
ATICG © 2001-2005
ATI Capital Group, Inc.
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Unique Features of ESOT
An ESOP trust “ESOT” has three very unique
features:
1. ESOT must own “principally” stock in its
sponsor company.
2. An ESOT is the ONLY qualified plan under
ERISA allowed to BORROW MONEY!!
3. The trust can purchase the Company in
“Stages” (multiple transactions).
ATICG © 2001-2005
ATI Capital Group, Inc.
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Powerful Use #1: Exit
Strategy
Qualified
QRPs
Replacement
Sec. 1042 Property= Stocks
& Bonds
5
Collateral
$ Loan
Div’d $
Lender
1
Corporation
The Basic
Transaction
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4
No Tax on
Transaction
Company
Deducts Princ.
On Loan
$ Loan
$
3
ESOP
ATI Capital Group, Inc.
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Benefits to the Corporation
 100% deductibility of PRINCIPAL and interest on ESOP
loan to buy-out Shareholder.
 Increased cash flow due to deductibility of principal on
loan.
 100% deductibility of DIVIDENDS paid to reduce ESOP
debt or distribute to participants.
 Collateral for ESOP created outside company.
 Preferred terms on ESOP loan.
Principal shareholder bought out for $0.66
dollars, compared to $1.52 dollars.
ATICG © 2001-2005
ATI Capital Group, Inc.
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How to Deduct Principal
Under ERISA
$121,328
Step 3
Lender
Co. makes payment
to lender
ABC
Step 1
Manufacturing $121,328 Co. makes
Company
contribution to ESOP
(fully deductible)
$
Step 2
ESOP makes
mirror payment
on Note Payable
to Co.
ESOP
$
Results:
Tax Deductible
Principal &
Interest
Assumptions:
•$10,000,000 ESOP transaction
•Terms: 8% APR; 10 yr. Amortization
•Monthly P + I = $121,328
ATICG © 2001-2005
ATI Capital Group, Inc.
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Benefits to the Selling
Shareholder
• Tax Deferral on 100% of the proceeds from the
sale of stock to the ESOP, under Sec. 1042 of
the Internal Revenue Code!
If the transaction is structured properly, capital
gains tax may be permanently deferred!!
NO CAPITAL GAINS TAX ON THE SALE OF
YOUR STOCK TO AN ESOP – EVER!
•ATICG © 2001-2005
ATI Capital Group, Inc.
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Powerful USE #2:
Purchase of Capital Goods
5
Capital
Goods
Collateral
Lender
4
1
$ Loan
The Basic
Transaction
ATICG © 2001-2005
$ Loan
2
3
$ Cash
Corporation
Stock
Capital Goods
Purchased With
Pre-Tax Dollars =
INCREASED
CASH FLOW
CAUTION:
Dilution!!
ESOP
ATI Capital Group, Inc.
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Benefits to the Corporation
 100% deductibility of PRINCIPAL and interest on ESOP
loan to buy capital goods.
 In addition to above deduction, can write-off capital goods a
second time by means of DEPRECIATION.
 Increased cash flow due to deductibility of principal on
loan.
 Collateral for loan created by acquiring the capital goods.
 Preferred terms on ESOP loan to acquire capital goods.
Capital Goods Acquired for $0.66 dollars (PT),
compared to $1.52 dollars (AT).
ATICG © 2001-2005
ATI Capital Group, Inc.
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Consolidation Math
Game
Sales
($millions)
5
Small
Businesses
2-3x
150
Lower
500
Middle
M I d d l e
4-7x
8-9x
1,000
Upper
M a r k e t
10-11x
Large
Companies
>12x
The Rules of this Game
● Identify your market segment
● You have a platform company
● Determine which competitors are not adding
value
● Go after all of them at once
● Use the Head-’n-Shoulders approach
● The toughest part is integrating the operations
● Don’t fall in love with the result
Powerful USE #3:
Purchase of a Target Company
5
Target
Company
Collateral
Lender
4
1
$ Loan
The Basic
Transaction
ATICG © 2001-2005
$ Loan
2
3
$ Cash
Corporation
Stock
Target Company
Purchased With
Pre-Tax Dollars =
INCREASED
RETURN ON INV.
CAUTION:
Dilution!!
ESOP
ATI Capital Group, Inc.
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Benefits to the Corporation
 100% deductibility of PRINCIPAL and interest on
ESOP loan to buy Target Company.
 Increased cash flow due to deductibility of principal
on loan.
 Collateral for loan created by acquiring the Target
Company.
 Preferred terms on ESOP loan to acquire Target
Company.
Target Company Acquired for $0.66 dollars (PT),
compared to $1.52 dollars (AT).
ATICG © 2001-2005
ATI Capital Group, Inc.
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The Rules of this Game
● Identify your market segment
● You have a platform company
● Determine which competitors are not adding
value
● Go after them one at time
● Take advantage of the tax savings
● Use the Head-’n-Shoulders approach
● The toughest part is integrating the operations
● Stop when you have had enough & achieve the
rest through internal growth